Transaction formalities, rules and practical considerationsTypes of private equity transactions
What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?
Most private equity transactions in the Netherlands relate to private M&A (investments by private equity in private companies and subsequent exits of those investments). Investments typically concern the purchase of 100 per cent or a majority of a target company, from a founder, strategic seller or another private equity sponsor. A rollover reinvestment by the seller has become increasingly customary in the Dutch market, particularly for founders (also seen in the case of corporate sellers) wishing or being requested to retain part of their investment in the target company. Minority investments by private equity sponsors are less common but increasing in the Dutch market. There are examples of private equity sponsors acquiring public companies (going-private transactions), including by international sponsors, but these are far less common. In part, this reflects the relative scarcity of listed target companies that are in the ‘sweet spot’ for private equity sponsors and where an approach would have a high chance of success, as well as the smaller group of sponsors who have experience or are interested in going-private transactions, which have a higher level of complexity compared to private transactions.
Similar to the Dutch private M&A market, a private equity investment transaction is typically structured as a share sale for cash consideration. This is driven by the relative speed and simplicity of implementation, making it attractive to sellers running competitive auction processes. Acquisitions are typically structured through an investment stack of three or four private limited liability companies established by the sponsor (investco – holdco – bidco, or investco – holdco – midco – bidco), mainly for financing reasons, limitation of liability, tax structuring and implementation of the later exit structure. The bidco signs the share purchase agreement (SPA) and acquires shares in the target company. Third-party (debt) financing is attracted at the level of bidco, and share pledges on the shares in the bidco are given to secure financing. Where a seller is making a rollover reinvestment, this is typically achieved through a cashless rollover into the holdco entity. The investco entity is the sponsor’s dedicated investment vehicle.
Where a management incentive plan is implemented as part of the transaction, the managers’ sweet equity investment is typically made through a foundation known as a STAK. The STAK will issue depositary receipts to the managers for the underlying shares, often shares in an intermediary management holding company (management holdco), interposed between the STAK and the top holding company of the corporate stack for tax structuring purposes. As a result, the managers indirectly hold the economic ownership of the underlying shares in the target company, while the legal ownership and voting rights remain with the STAK and the management holdco. The board of the STAK and the management holdco typically consists of the CEO and other key managers, and representatives of the sponsor.Corporate governance rules
What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?
Dutch corporate law for both private and public entities is largely governed by the Dutch Civil Code, which sets out the powers and duties of different corporate bodies, as well as rules relating to conflicts of interest and liability of management board members.
For private companies, Dutch corporate law is fairly flexible and specific rights and obligations can be accommodated in a company’s articles of association. Nevertheless, shareholders’ rights are often contractual in nature and set out in the shareholders’ agreement (which the parties may agree to keep confidential) rather than in the articles of association (which are publicly available through the Dutch trade register).
For listed companies, certain additional requirements apply. These include provisions of the Dutch Corporate Governance Code and the Dutch Financial Supervision Act. The Dutch Corporate Governance Code (as fully revised in 2022) exclusively applies to listed companies. These provisions involve, among others, mandatory disclosure and reporting, tender offer and diversity obligations. Furthermore, certain non-financial reporting obligations under the Corporate Sustainability Reporting Directive will start to apply to European-listed companies as of the financial year 2024 – for non-listed companies these obligations will start to apply at a later date.
The advantages of going private are typically company-specific. In a general sense, going private entails that the company can be run (largely) on the basis of a single ownership standard, thus offering greater flexibility (also because the previously mentioned additional requirements no longer apply).
The main effect of a company conducting an IPO is the application of several statutory and governance rules. Should a private equity sponsor retain a sizeable equity stake post-IPO, the listed company may seek to conclude a relationship agreement with its (controlling) shareholder addressing, for instance, board nomination and shareholder information rights.Issues facing public company boards
What are some of the issues facing boards of directors of public companies considering entering into a going-private or other private equity transaction? What procedural safeguards, if any, may boards of directors of public companies use when considering such a transaction? What is the role of a special committee in such a transaction where senior management, members of the board or significant shareholders are participating or have an interest in the transaction?
There are certain potential conflicts of interest that face boards of directors of public companies when considering entering into a going-private transaction. First, conflict of interest issues may arise where a large shareholder with board representation makes a bid for the company. While it is not common for PE funds to have a majority stake and board representation in a listed company, there can be situations where this becomes relevant for a PE fund (eg, when teaming up with one or more existing shareholders, or if a PE fund has retained a significant stake following an IPO). Dutch going-private transactions by large shareholders with board representation have been criticised by minority shareholders and the Dutch Association of Stockholders, arguing that the majority shareholder had abused its position to acquire the company and the minority shareholders’ equity interest below fair value. Second, conflict of interest issues may arise due to a private equity bidder offering the management of the target company the opportunity to participate in a management incentive plan or co-investment. This may present a conflicting interest to the directors’ role in evaluating the transaction and negotiating key terms (in particular, price) or choosing a preferred bidder in a competitive process. Certain safeguards can help to mitigate this, such as ensuring full transparency and that detailed discussions regarding a management incentive plan or co-investment take place late in the process.
If a public company is approached for a potential going-private transaction by a large shareholder or private equity bidder, it is customary that the boards of the target company implement certain procedural safeguards to ensure an independent and objective assessment of any proposals, such as the establishment of an independent committee to represent the target company, closer involvement of the supervisory board in the discussions with the bidder, or conflicted board members not participating in board meetings regarding a going-private situation to create maximum distance. An independent committee typically consists of non-conflicted, independent supervisory board members, supported by independent advisers.Disclosure issues
Are there heightened disclosure issues in connection with going-private transactions or other private equity transactions?
Disclosure requirements in the context of public M&A transactions in the Netherlands follow from both the general disclosure requirements for Dutch listed companies under the EU Market Abuse Regulation and specific disclosure requirements in the context of a public offer under the Dutch Financial Supervision Act and the Dutch Public Takeover Bid Decree.
Under the EU Market Abuse Regulation, Dutch listed companies are obliged to disclose inside information. Whether a potential offer for a Dutch listed company qualifies as inside information needs to be assessed on a case-by-case basis. We see that listed companies often consider an approach to qualify as inside information following receipt of an indicative proposal including a proposed offer price.
In practice (absent any leak that could trigger an early disclosure), the disclosure of inside information about a potential public offer coincides with the mandatory announcement of a public offer under the Dutch Public Takeover Bid Decree to make an announcement once parties have reached a (conditional) agreement about an offer. It is market practice that the announcement is quite extensive and contains a description of the strategic rationale and financial considerations for the public offer, and of the main terms of the merger protocol or agreement between the bidder and the target company, including the non-financial covenants that are intended to serve the interests of the target company’s stakeholders. In addition to the announcement of the transaction, the bidder and target company must issue press releases for certain milestones in the transaction process – for example, filing the offer memorandum with the Dutch Authority for the Financial Markets (AFM), declaring the offer unconditional and so on – and in case they conduct transactions in the securities to which the offer relates.
The bidder is obliged to prepare a detailed offer memorandum that contains all relevant information for the target company’s shareholders about the offer. A draft of the offer memorandum must be submitted to the AFM for its review and approval. The offer memorandum includes detailed information on numerous topics such as, among others, the strategic rationale of the offer, the offer price and other conditions relating to the offer.
The target company is required to prepare and publish a position statement in which it explains to its shareholders its views and position on the public offer – this can either be positive (including a recommendation to participate in the offer), negative (including a recommendation not to participate in the offer) or, rarely, neutral.
If a business combination or acquisition of a listed company takes place pursuant to a legal merger, the merging entities are required to publish a merger proposal with explanatory notes. The merger proposal should contain details regarding the merger and strategic rationale for the underlying business combination.
Apart from the disclosure obligations listed above, there are no specific disclosure obligations for going-private transactions. There are also no heightened disclosure obligations in connection with private equity transactions in general that do not have a public aspect.Timing considerations
What are the timing considerations for negotiating and completing a going-private or other private equity transaction?
For going-private transactions (public M&A), the time frame between approaching a target and signing can move quickly, but it can also take some time (depending to a large degree on negotiation tactics from both sides and the scope of diligence). Once there is intensive engagement between the target and the bidder, due diligence is typically conducted in three to six weeks and signing the merger agreement occurs shortly thereafter (around six to 10 weeks from the start of engagement). The timeline from signing to going private and delisting is predominantly dependent on:
- the necessary (regulatory) approvals;
- the form and timing of the public offer; and
- the measures implemented to obtain full ownership (such as statutory squeeze-out proceedings or pre-wired back-end structures).
Going-private processes generally consist of the following phases:
- pre-announcement phase, leading up to signing the merger agreement (about four to 10 weeks);
- preparatory phase for launch of the public offer (about six to 12 weeks);
- public offer phase, during which shareholders can tender their shares (about eight to 10 weeks, subject to extension for regulatory approvals);
- settlement of the public offer (about one week); and
- obtaining full ownership and delisting:
- statutory squeeze-out proceedings (approximately three to seven months); or
- pre-wired back-end structures (full ownership shortly after settlement of the public offer, with the ‘formal’ liquidation of the target company taking several months).
With respect to other private equity transactions (private M&A), sellers will typically set their own timetable, depending on competitive dynamics. There are no specific statutory requirements for timing. In the past couple of years, sale processes for private equity transactions were most often structured as controlled auctions consisting of the following phases:
- sell-side preparatory phase or market testing (about four to 12 weeks);
- non-binding offer phase (about four to six weeks);
- binding offer phase (about five to six weeks);
- execution phase (about one day to four weeks); and
- closing phase (about four to 16 weeks).
A process letter (shared at the start of the non-binding offer phase and the binding offer phase) is used to set deadlines and confirm the seller’s control of the process, as well as to establish certain requirements for submission of an offer. While the above phases are illustrative of a typical auction process in the Dutch market, this may play out differently based on market and deal dynamics. Sometimes, the controlled auction includes an interim phase, between the non-binding and binding offer phase. In the interim phase, certain sell-side reports (or extracts thereof) are shared with bidders, allowing them to firm up their non-binding offer. This will shorten the binding offer phase and may allow certain bidders to accelerate and make pre-emptive offers before the end of the binding offer phase.
There are certain circumstances in which one-on-one processes are sometimes preferred over controlled auction processes, for instance, transactions with obvious purchasers, unsolicited approaches with a knock-out offer or transactions between sellers and buyers with longstanding relationships. In such bilateral processes there may still be different phases and deadlines, but these are generally less rigid.Dissenting shareholders’ rights
What rights do shareholders of a target have to dissent or object to a going-private transaction? How do acquirers address the risks associated with shareholder dissent?
In the Netherlands, a going-private transaction typically takes the form of a public offer. Shareholders have the possibility to tender their shares under the public offer or keep their shares. In a public offer, there is no shareholder vote whereby the majority binds the minority (contrary to the US and UK systems, for example, where most public deals are subject to a binding shareholder vote). As a result, the shareholders that do not tender their shares simply remain shareholders in the company and the company will remain listed if less than 95 per cent of the issued and outstanding shares are ultimately held by the bidder.
A majority shareholder that holds at least 95 per cent of the issued and outstanding share capital of a Dutch company as well as 95 per cent of the voting rights can initiate squeeze-out proceedings to force the remaining shareholders to transfer their shares. Squeeze-out proceedings are held before the Enterprise Chamber of the Amsterdam Court of Appeals. A majority shareholder can initiate squeeze-out proceedings by serving a writ of summons on all minority shareholders, where anonymous shareholders are served by means of a public notification.
Aside from statutory squeeze-out proceedings, a practice has been established in the Netherlands that provides bidders a pathway to 100 per cent ownership of the share capital of a Dutch listed company, in case bidders do not obtain at least 95 per cent of the issued and outstanding share capital as a result of a public offer. It is nowadays common that the bidder and target company agree on a ‘back-end structure’, which facilitates this. In its simplest form, a back-end structure would involve an asset sale to the bidder, a subsequent liquidation of the target company and a liquidation distribution to its shareholders. The typical back-end structure has developed further over the past few years whereby the asset sale has been replaced by a more complex transaction structure involving multiple steps to effectively transfer the business of the target company through a merger.
It is important to note that a back-end structure will require the approval of the shareholders’ meeting of the target company. It is often agreed that the back-end structure cannot be implemented without the support of the target company if the number of shares tendered under the public offer falls below a minimum percentage of shares. There is a consistent market practice of setting acceptance thresholds around 80 per cent of the outstanding capital, irrespective of the number of shares already held by the offeror. Since back-end structures expand the possibilities for bidders to effectively buy out minority shareholders outside the scope of statutory squeeze-out proceedings, these structures entail an inherent risk of shareholder litigation. Key safeguards that need to be in place are that the company’s board followed a careful decision-making process independent from the offeror (particular care for the free float interest will be required if the offeror is a controlling shareholder), adequate transparency is ensured and minority shareholders are given a realistic exit opportunity and receive a fair price for their shares.Purchase agreements
What notable purchase agreement provisions are specific to private equity transactions?
As in private M&A more generally, in private equity transactions the seller and purchaser will negotiate certain covenants, warranties and indemnities in the SPA. Warranties can be divided into fundamental, business and tax warranties, and typically a tax indemnity is also included. Warranties are commonly qualified by fair disclosure through the data room.
In the vast majority of the Dutch (mid-market and large-cap) private M&A markets, warranty and indemnity (W&I) insurance is used, and this is an even higher majority for private equity transactions (particularly sponsor exits). Where W&I insurance is used, there are certain impacts on the provisions of the SPA. The seller’s liability (for business warranties and tax claims) is capped at a nominal amount, typically €1, with the W&I insurance policy as the sole path of recourse for such claims. Fundamental warranties (limited to either the target company only or also including all or part of the subsidiaries) are subject to a higher cap – typically 100 per cent of the consideration. The time limitations for bringing a claim will vary depending on the nature of the warranty, negotiation positions and other circumstances. In general, for W&I-insured deals, two years tends to be market standard for business warranties, and seven years (or the relevant statutory period, where applicable) for fundamental warranties and tax claims.
For a private equity purchaser, the seller will require (prior to signing of the SPA, typically together with the bidder making its offer) that an executed equity commitment letter and debt commitment letter (or full-fledged signed financing documents) are delivered. Debt commitment papers often attach long-form terms and fundable interim facility documentation, which can be signed within one day’s notice. Consequently, the SPA will typically not contain a financing condition, but certain funding provisions referencing the debt commitment documentation and equity commitment letter. These will include warranties regarding sufficiency of funding to fund the amounts required at closing, and confirmation of no default under the debt commitment documentation. The purchaser will give certain undertakings in relation to the debt commitment documentation, including to satisfy conditions precedent thereunder, to obtain financing on or prior to closing, and to obtain replacement financing if for any reason financing under debt commitment documentation is absent or insufficient. Sellers will offer certain cooperation undertakings in relation to the financing (eg, assistance with marketing, provision of certain information and meeting know-your-customer requirements).Participation of target company management
How can management of the target company participate in a going-private transaction? What are the principal executive compensation issues? Are there timing considerations for when a private equity acquirer should discuss management participation following the completion of a going-private transaction?
In most going-private transactions, management is already invested in equity or phantom equity plans of the target company. For public companies, these plans typically take the form of restricted stock units or performance stock units under the companies’ long-term incentives programmes. Existing schemes are typically settled at the closing of the going-private transaction with the private equity sponsor seeking to put in place a sweet equity plan, stock appreciation right scheme or other incentive scheme of its own. Key considerations include an analysis around whether the existing programmes include elements that conflict with settlement at closing (eg, specific holding periods) and careful planning of any rollover of proceeds into the new incentive scheme (including from a tax perspective).
It is common to agree with existing target company management on their post-transaction participation. In this process, management will need to navigate the (potential) conflicts of interest that arise. High-level discussions typically take place in the final stage of negotiations prior to announcement with detailed discussions only taking place thereafter (and sometimes only after the general meeting has taken place where the target company has discussed the offer). Any agreed details around the potential management participation that has been agreed prior to publication of the offer memorandum must be disclosed in the offer documentation.
Management will not always be familiar with the incentive structure put forward by a private equity bidder (especially if it concerns US-style incentive structures), and pro-active and detailed explanation of the proposed structures can help avoid the management participation becoming a gating item. Following the Dutch market practice (to the extent practicable) can help to ease the process, particularly where there are numerous Dutch tax residents involved.Tax issues
What are some of the basic tax issues involved in private equity transactions? Give details regarding the tax status of a target, deductibility of interest based on the form of financing and tax issues related to executive compensation. Can share acquisitions be classified as asset acquisitions for tax purposes?
Following increased scrutiny by the Dutch tax authorities of the deductibility of interest on shareholder loans and the introduction of additional limitations on interest deductibility (eg, the 20 per cent EBITDA rule) and a withholding tax on interest paid to related parties located in tax havens, sponsors typically only use equity and third-party debt to fund the Dutch investment stack making the acquisition. The bidco will typically attract the third-party debt and – together with the other members of the Dutch stack – form a fiscal unity for corporate income tax purposes with the Dutch target companies to be able to offset interest expenses against Dutch operating profits. The holdco is typically capitalised by a combination of ordinary shares and fixed return cumulative preference shares – the latter to create envy for the management holdco that typically also invests in the holdco, but only acquires ordinary shares. In the case of an international management team consisting of managers tax resident in and outside of the Netherlands, the management investment structure is often set up further up the chain (eg, at the level of a Luxembourg entity higher up in the stack).
Where a sponsor is domiciled outside the Netherlands, a key exit structuring consideration is to implement an investment structure that allows the sponsor to realise a tax-exempt capital gain through the sale of the shares in the Dutch top holding company by the non-Dutch holding company (eg, a Luxembourg entity). If cumulative preference shares are outstanding, such shares are typically sold including accrued dividends. Otherwise, dividend distributions (ie, the proceeds in excess of the contributed capital) are generally subject to 15 per cent dividend withholding tax. Further, the Dutch top holding company of the group is generally the parent of a fiscal unity for corporate income tax purposes. This also allows for selling the whole Dutch corporate group without:
- terminating the fiscal unity and potentially triggering de-grouping tax charges;
- retaining residual tax liability; and
- causing issues around non-insurability of potential secondary tax liabilities.
This typically requires a sale by the sponsor, potential co-investors and management incentive plan (MIP) vehicles, resulting in some complexity in the transaction docs (ie, more than one seller).
The managers’ MIP investment through the STAK and management holdco is typically structured in a tax efficient manner for the managers. To confirm the tax treatment of the managers’ investment, an advance tax ruling may be – and generally is – requested from the Dutch tax authority to confirm:
- the absence of taxable income upon the making of the investment; and
- the tax treatment of the future gains.
The ruling will likely not be obtained before closing the transaction, and managers will therefore typically:
- enter into a commitment letter setting out the terms of their participation; and
- transfer the amount they will invest to the target company as a prepayment for their depositary receipts (or alternatively enter into an individual interest free loan, to be converted once the ruling is obtained).
In the early stages of negotiations with management, it should be considered that it is difficult to avoid the realisation of upfront income if – as a rule of thumb – in the sponsor’s investment case the money multiple expected to be realised by the managers is more than twice the money multiple of the sponsor. It is customary that management take the lead on the tax ruling process, together with its tax adviser, as it is also their risk. If no tax ruling is obtained within six to 12 months after closing the transaction, the original investment structure will be implemented (unless agreed otherwise). The increase of the Dutch tax rate applicable to traditional Dutch management participation structures as per 2024 (the ‘box 2 rate’ will increase to up to 31 per cent) is expected to make these structures less attractive, especially given their implementation and maintenance costs. Generally, it will be agreed that managers are liable for any tax or social security contributions and other levies related to their investments based on a tax indemnity. In the context of Dutch MIPs structured through a STAK and management holdco, non-Dutch managers (eg, Belgian managers) often prefer to sell their depositary receipts to realise a lower taxed or exempt capital gain instead of a dividend. This should be considered early in the process to avoid last-minute changes and discussions.